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Scenario Timbers Department Store prepares its budgets quarterly. The following information is available for use in planning the second quarter budgets for 2022. TIMBERS DEPARTMENT STORE Balance Sheet March 31, 2022 Assets Liabilities and Stockholders' Equity Cash $4,000 Accounts payable $31,000 Accounts receivable 31,000 Dividends payable 15,000 Inventory 36,000 Prepaid insurance 3,000 Stockholders' equity 53,360 Fixtures 25,360 Total assets $99,360 Total liabilities and equity $99,360 Actual and forecasted sales for selected months in 2022 are as follows: Sales Revenue by Month Month Sales Revenue January $70,000 February 60,000 March 50,000 April 60,000 May 70,000 June 90,000 July 100,000 August 90,000 Monthly operating expenses are as follows: Category Amount Wages and salaries $27,000 Depreciation 300 Utilities 1,500 Rent 3,000 Cash dividends of $15,000 are declared during the third month of each quarter and are paid during the first month of the following quarter. Operating expenses, except insurance and depreciation, are paid as incurred. The prepaid insurance is for six more months. Cost of goods sold is equal to 50 percent of sales. Ending inventories are sufficient for 120 percent of the next month’s cost of goods sold. Purchases during any given month are paid in full during the following month. All sales are on account, with 50 percent collected during the month of sale, 40 percent during the next month, and 10 percent during the month thereafter. Cash Management Policy: Money can be borrowed and repaid in multiples of $1,000 at an interest rate of 12 percent per year. For budgeting purposes the company uses simple interest for all interest calculations. The company desires a minimum cash balance of $4,000 on the first of each month. At the time the principal is repaid, interest is paid on the portion of principal that is repaid. All borrowing is at the beginning of the month, and all repayment is at the end of the month. Money is never repaid at the end of the month it is borrowed. Any repayment of past borrowings can only occur if the monthly ending cash balance is greater than $10,000 (after partial or full repayment of past borrowing). With the above information you and your group can now prepare the second quarter budget for Timbers Department Store. Memo and Appendices The memo should address the following issues about the budgeting process: · Describe why budgeting is necessary. Why do we start with the sales budget? · What is budgetary slack (see Module 22 page 21)? Give examples and explain why we should expect it to occur. How can we minimize slack in our organization? · Give a summary of the just prepared budget for Timbers Department Store. Make sure you address the adequacy of the Cash Management Policy, and if necessary, suggest reasonable changes to this policy. · What insights have you taken from this budgeted quarter that can apply to future budgets of Timbers? The appendices should provide a reference source for the memo. It is strongly recommended that you use a spreadsheet program when developing the appendices. Our required textbook has a good example of budgeting on pages 22-7 through 22-14; have you read/studied this section of the textbook yet? The following items (think spreadsheet tables) must be included in your appendices: · Prepare a purchases budget for each month of the second quarter ending June 30, 2022. · Prepare a cash receipts schedule for each month of the second quarter ending June 30, 2022. Do not include borrowings. · Prepare a cash disbursements schedule for each month of the second quarter ending June 30, 2022. Do not include repayments of borrowings. · Prepare an overall cash budget for each month of the second quarter ending June 30, 2022. Include budgeted borrowings and repayments. · Prepare a pro forma income statement for each month of the second quarter ending June 30, 2022. · Prepare a pro forma budgeted balance sheet as of June 30, 2022. · Other appendices as needed. Hint: It is to your group’s benefit to supply your instructor with a spreadsheet the can be used for what-if analysis. That is, can I use your spreadsheet to adjust sales amounts, assumptions, and so on to see the effect of the changes on the budget? If you can, your team will earn a higher score. You do not need full automation! [Only automate the loan borrowings/repayments calculation if you understand the =IF(logical_test,value_if_true,value_if_false) feature of Excel.]